Diversity is crucial in so many aspects of life: things are often improved when variety comes into the picture—backgrounds, perspectives, opinions, even diets. The same is true for investments. And if you’ve talked to an advisor before, you’ve probably heard about the importance of diversifying your holdings. But what does that actually mean?
Those focused on buying and selling stocks may say it’s about having both value stocks and growth stocks in your portfolio. They may also counsel you on the merits of diversifying across market sectors—tech, financial, energy stocks, and more. Bond marketers may recommend that you acquire a diversity of bond types: government, corporate, mortgage-backed, and municipal. Those who earn a living selling structured products and annuities may encourage you to buy several kinds of their products—which certainly sweetens the deal for them, since they typically work on commission. But apart from the interests of professionals looking first and foremost to make a bigger profit, what’s real diversification? It’s about acquiring a mix of holdings that makes sense for your particular situation.
What does that look like? It’s often about having a properly allocated combination of large-, mid-, and small-cap domestic and foreign equities for long-term growth; bonds for potential income; and liquid assets—such as money markets, cash, and short-term treasuries—to meet more immediate expenses and income needs. With that kind of diversity, your money has the opportunity to grow, while remaining protected from significant shifts in the market. And as a result, when you need it—whether to cover the cost of a big expense, like a child’s college tuition or a new home; to fund your retirement; or to leave behind a legacy you can be proud of—it’s there.
The key, though, is that your diverse portfolio is specifically tailored to fit your needs. Optimizing your investments can’t happen with a one-size-fits-all approach. There’s no way that, say, the standard balanced funds strategy (60 percent equities/40 percent bonds), can account for what exactly you need, when and how you need it. That’s why an experienced advisor who is actively managing your portfolio allocation can be invaluable. For more information on my approach, visit debrabrede.com.
Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.
